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Why Size Matters- Especially When $1 is at Stake

Sunday, 28 Jan 2007 | 9:41 AM ET

I am talking about the size of private equity deals, and how big they can get this year ... and the bet I've got with Fast Money'sDylan Ratigan.

With the bidding war over Equity Office Properties, it already looks like a new deal size record could be set. But how big a deal could the markets handle? That is the question at the heart to the all-in-fun $1 wager Dylan and I have made.

Here's my thesis: In 2007, we could see a deal as big as $45 billion.

Here's Dylan's: BP, which has a market cap of $200b+ could be a target.

With the help of a private equity manager at dinner the other night, we worked out why even $100 billion might be too much for the market to absorb. Assuming 5 to 1 leverage, funds would have to come up with $20 billion dollars. Given some private equity firms are raising $10b funds this year, a few players would have to participate so that a single deal doesn't consume one fund.

But banks would also have to be willing to extend $80b in credit for a single target. And that looks unlikely, once you take into account that the debt to cash flow ratio on deals has averaged 5.7 lately. That would mean annual cash flow for the target would have to be $14b.

Food for thought: David Rubenstein, co-founder of Carlyle, has predicted deal size to reach $50b in 2007.

So, all in all, that's why I made the bet. What do you think?

Write Melissa Lee at PowerandMoney@cnbc.com